Francesco Pesole at ING flags that weak April Canadian labour data and a still-dovish jobs contribution to Bank of Canada policy contrast with a widening USD/CAD two-year swap spread and emerging USMCA risk premium. ING’s BoC view is more dovish than markets, leaving them less optimistic on the Loonie versus other commodity currencies and seeing non-negligible risks of USD/CAD testing 1.40 in coming days.
"Canada releases May’s job market data at the same time as the US today. The narrative here has been less constructive. April figures were poor, with unemployment jumping to 6.9% and 17.7k net job losses."
"Consensus is looking at a stabilisation today: 6.9% and +10k. But unless we see unemployment inch back lower, the contribution of the jobs market to the Bank of Canada policy will remain dovish."
"The USD/CAD two-year swap rate gap has widened by around 25bp to its highest level since pre-liberation day. That has underpinned the recent rally in USD/CAD, alongside the first signs of risk premium emerging about the USMCA renegotiations."
"Our view remains more dovish than the market on the BoC, which still appears to have a higher bar for hiking rates than the Fed due to domestic economic challenges and uncertainty about the USMCA."
"So, while our call beyond the short-term still leans USD bearish, we remain less excited about the potential of the loonie relative to other commodity currencies (the Australian dollar, New Zealand dollar, and Norwegian krone). In the coming days, the risks of a test of 1.40 in USD/CAD are non-negligible."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)